US Fed cuts interest rates, and signals it is on hold

WASHINGTON: The Federal Reserve on Wednesday cut interest rates for the third time this year to ensure the US economy weathers a global trade war without slipping into a recession, but signaled it will leave borrowing costs where they are unless things take a material turn for the worse.

“We believe that monetary policy is in a good place,” Fed Chair Jerome Powell said in a news conference after the US central bank announced its decision to cut its key overnight lending rate by a quarter of a percentage point to a target range of between 1.50% and 1.75%.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” he said.

Risks relating to global trade, as well as to the prospect that Britain would crash out of the European Union, have moved in a “positive direction” since the Fed’s last meeting, Powell said, adding that the US economy has remained resilient.

With the stimulative effects of the Fed’s rate cuts so far this year still working their way through the economy, only “a material reassessment of our outlook” could drive the central bank to cut rates further from here, Powell said. Currently the Fed expects moderate economic growth, a continued strong labor market, and inflation to move back up to its 2% annual target.

In the statement accompanying its decision to cut rates, the Fed dropped a previous reference that it “will act as appropriate” to sustain the economic expansion – language that was considered a sign for future rate cuts.

Instead, the Fed said it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target interest rate, a less decisive phrase.

The rate cut was widely anticipated by financial markets, but expectations for additional cuts after October have diminished significantly in recent weeks.

While yields on longer-dated bonds showed little reaction, those on shorter-dated maturities that are more closely influenced by Fed policy expectations, moved higher. The yield on the 2-year note US2YT=RR rose to the highest since Oct. 1 at about 1.67%.

US stocks, down modestly before the Fed’s statement, pared some of their losses and were little changed on the day. The benchmark S&P 500 Index .SPX, which had hit a record high earlier in the week, was down fractionally.

“It’s pretty much what was expected,” said Jim Powers, director of investment research at Delegate Advisors.

“The more important outcome is they removed the phrase ‘act as appropriate.’ It looks like the market is taking that to mean that there will be a pause in the declining rate path they were on beforehand. That’s what was expected, and that’s generally a good thing,” Powers said. Reuters

 

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